Standing Committee F

[Mr. Roger Gale in the Chair]

Finance Bill

(Except clauses 14, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38) - Clause 108 - Land in disadvantaged areas

Question proposed [this day]: That the clause stand part of the Bill. 
 Question again proposed.

Roger Gale: I remind the Committee that with this we are taking new clause 16—Rate of stamp duty on commercial property—
'.—(1) In Schedule 13 to the Finance Act 1999 (instruments chargeable and rates of duty) after paragraph 3 of that Schedule insert a new paragraph 3A— 
 ''3A In the case of a conveyance or transfer of land which is not residential property within the meaning of section 92A of the Finance Act 2001 the rates of duty are as follows— 
 1. Where the amount or value of the consideration is £60,000 or under and the instrument is certified at £60,0000Nil 
 2. Where the amount of the consideration is £250,000 or under and the instrument is certified at £250,0001% 
 3. Any other case2%'' 
 (2) This section applies to instruments executed on or after 1st August 2002.'.

Howard Flight: I have great pleasure in welcoming you back to the Chair, Mr. Gale.
 When I was winding up the stand part debate, I felt that the Paymaster General had slightly misrepresented the gist of my points. My first point was that we are not voting against tax incentives of either nil or low stamp duty in deprived areas, but want to point out that such an approach may be positive for deprived areas but negative for their adjacent areas. Even under the terms of clause 108, things can get subjective: the Government have chosen to exempt particular areas, but other equally worthy ones, where exemption would have been in the community's interest, have not been chosen. Such fiscal fine tuning has a habit of producing contrary results. In essence, we merely urge caution. 
 My second main point concerns the reason for new clause 16, which could candidly have appeared in other clauses that relate to stamp duty; the clause is clearly probing. The figure of 4 per cent. stamp duty on property used by business is significant; it makes for illiquidity and can cause problems, depending on who owns the property, if businesses want to expand or contract. 
 Bluntly, the reason for subsequent anti-avoidance clauses is that businesses and insurance companies, which are often the owners of commercial property, feel that such a level of stamp is less than acceptable—
 hence their great efforts to avoid it. I am told by tax experts that aside from the specifics of the clauses there is a never-ending list of other possible schemes through which businesses seek to avoid stamp duty. The Government will face that problem because, although it may be an easy source of revenue for the Government, to business it is a material tax on economic activity. According to the logic of the clause, one could impose a 4 per cent. tax every time that someone buys a new piece of equipment or new machinery for a factory, but that will not happen because we have capital allowances. For some reason, business premises are seen as ''bad'' and should be out in the open, but machinery and equipment are seen as ''good.'' I do not believe that the Government have thought about the underlying economic issues; the new clause asks them to. 
 Historically, the Treasury and Government response has been to say that we cannot have different rates of stamp duty for private residences and property because it would be too complicated. However, clause 108 achieves just that for deprived areas. Our main plank of opposition is that the Government are saying that the housing market varies and that it is a bull and bear market so stamp duty is required to go up and down over time, but that a different economic territory exists for the stamp duty that applies to commercial property. 
 We will not press the new clause. We moved it to make the fundamental point that applying 4 per cent. to all premises owned by businesses is a major economic issue. It creates too convenient a milch cow, which results in major attempts, which will continue, at avoidance. Down the line, particularly in more difficult economic conditions, businesses may have problems with physical illiquidity. 
 We wish the whole of clause 108 luck because we want to see improvements to run-down areas in inner cities. As I said earlier, some cities have already done very well and for better or worse—this is perhaps a bad thing—virtually every MP has an interest in seeing the scheme succeed. 
 I began before lunch and have made one or two points, but the main point on which I should like the Paymaster General to comment is why certain areas are given exemption treatment. Why not think about accommodation for nurses, key public sector workers and other potentially more deserving cases than are currently in the specified category of exemptions in the clause?

Dawn Primarolo: Good afternoon, Mr. Gale. I shall answer the final point made by the hon. Member for Arundel and South Downs (Mr. Flight) because he has re-established many points made throughout the debate and I do not want to repeat myself. We have had a debate about the difficulty in setting a boundary. We are all agreed on the principle of helping the regeneration of disadvantaged areas, and the deprivation index is as suitable a tool as any; indeed, it is probably the best.
 I acknowledged the Government's difficulty in setting the boundary line in the debate. The Revenue have regulatory powers in the clause, and as we 
 monitor and analyse the use of the relief and whether it is making the contributions about which we have spoken this morning to regeneration, it is important that we have the power to fine-tune the relief. 
 We have the power and the process, but I acknowledge that that is not necessarily the last word. The hon. Gentleman's hon. Friends have made it clear in the course of debate that the complexity of the issue, on which we are all agreed, will make it necessary to keep an eye on it. Should it require further fine tuning we will have the ability to do that. It is not a closed book. I have taken on board all the hon. Gentleman's points, but at this point in time I thank him for his best wishes for clause 108 and note his comments on new clause 16. 
 Question put and agreed to. 
 Clause 108 ordered to stand part of the Bill.

Clause 109 - Withdrawal of group relief

Howard Flight: I beg to move amendment No. 224, in page 87, line 42, at end insert—
'(9A) This section shall not apply unless the main purpose or one of the main purposes of the execution of the relevant instrument was the avoidance of taxation.'.

Roger Gale: With this we may discuss the following amendments: No. 225, in clause 111, page 89, line 44, at end insert—
'(8A) This section shall not apply unless the main purpose or one of the main purposes of the execution of the relevant instrument was the avoidance of taxation.'.
 No. 226, in clause 113, page 91, line 28, at end insert— 
'(9A) This section shall not apply unless the main purpose or one of the main purposes of the contract or agreement mentioned in subsection (1) above was the avoidance of taxation.'.

Howard Flight: The clause will introduce new anti-avoidance rules into the stamp duty regime relating to stamp duty group relief under which stampable assets can be transferred within a 51 per cent. group without incurring stamp duty. Theoretically, groups can transfer an asset between group companies and then sell the shares of the company owning the shares to avoid paying the 4 per cent. stamp duty charge.
 Section 27 of the Finance Act 1967 deals with a situation in which there is intent to dispose of an asset outside the 51 per cent. group after a transfer, which would deny group relief where that is the intent. The clause further tightens the rules by stating that where an asset is sold by a group within two years via the disposal of shares rather than a direct sale of the stampable asset, even if there was no intent aforesaid at the time of the transfer, the group relief on stamp is clawed back. The clause thus gives groups certainty over when they can dispose of companies within the two-year time limit, but the Confederation of British Industry and others view that limit generally as too long and taking no account of commercial situations that could arise where tax avoidance is not the aim. I repeat my point that it is hardly surprising that companies seek to avoid a stamp duty of 4 per cent. 
 when they pay only 0.5 per cent. on the transfer of shares. As the Government well know, they might even not pay that at some time in the future. 
 The Institute of Directors has commented: 
''The Government's problems with the avoidance of stamp duty are largely of its own making . . . A charge of 4 per cent. on the full value of an asset, wholly unrelated to any income which might be derived from that asset . . . is exorbitant.''
 It makes the point that the 
''particular provision is not even targeted on avoidance cases. It will apply even when the intra-group transfer and the sale were both bona fide commercial transactions''.
 The Institute notes that 
''the Government considers two years to be an adequate period for the current purposes''
 but says that that 
''should be an adequate period for the purposes of''
 section 179 of the Taxation of Chargeable Gains Act 1992. It argues for 
''a shortening of the six-year period over which that section can operate.''
 Another general point that has been made is that two years is too long and that if a transaction is carried out without a view to being associated with a group reorganisation, no one will wait for anything like that long. 
 Subsection (2)(b) provides that stamp duty is payable within 30 days of the transfer and of the transferee companies ceasing to be members of the same group, whereas paragraph 4 of schedule 34 provides that interest on late-paid stamp duty runs from 30 days following the date on which the relevant instrument was executed. A suggestion has been made that the dates of payment of duty and the date from which interest rates run should correlate. 
 The Chartered Institute of Taxation has commented that 
''if there is to be a de-grouping charge'',
 the need for a measure under section 27 of the Finance Act 1967 disappears and the exemption under section 42 of the Finance Act 1930 
''at the time of the intra-group transfer should be automatic.''
 It also thinks that the two-year period is too long and that the provisions are too all-embracing and should be more focused on tax avoidance. 
 The Chartered Institute of Taxation feels that the mischief at which the provisions on the charge of interest from 30 days are aimed 
''could be far better dealt with by a simple extension to the meaning of 'arrangements''',
 such as that in section 27(3) of the 1967 Act. That could be achieved, for example, by including 
''wording similar to that in clause 110(6) . . . which will include any scheme, arrangement or understanding, whether or not legally enforceable within the meaning of 'arrangements'. This would reduce the threshold of the 'burden of proof' that in practice the Inland Revenue Stamp Taxes have to cross in order to show that an intra-group transfer does not qualify for group relief.''
 Amendments Nos. 224, 225 and 226 would all insert a motive test into their respective clauses, following the line of argument that the business community has 
 pretty universally put forward, to which I have referred in the past few minutes. Only actual tax avoidance should be targeted in clause 109, to which amendment No. 224 refers, clause 111, to which amendment No. 225 refers and clause 113, to which amendment No. 226 refers. The principle here is a tax avoidance test on the stamp duty anti-avoidance provisions. In particular, in clause 113 where sub-sale relief is threatened, the addition of a tax avoidance test should ensure that the provisions do not harm transactions entered into for bona fide commercial reasons. It is unfair that a manufacturing company transferring property to a subsidiary should be caught if it did not intend to sell the subsidiary within two years or that the sub-sale should effectively be abolished. 
 We hope that the Government will see the light, although we doubt that they will. Although the two-year rule brings a defined clarity, it will also bring unfairness and problems, particularly for manufacturing businesses needing to restructure. As a result of necessary sales, companies may fall outside the two-year rule, potentially triggering large stamp duty bills which they may not be able to afford. In such circumstances and in a rather difficult economic climate, the next thing that we will hear is that the Government are putting up money to rescue manufacturing companies caught by the measure. The anti-avoidance principle should be seriously considered.

Ruth Kelly: Good afternoon, Mr. Gale. The Government are concerned about the growing avoidance of stamp duty by a minority at the expense of the majority of taxpayers. In particular, some companies are determined not to pay their full share of duty and structure property transactions in increasingly artificial ways to achieve that. Such activity represents a significant threat to the tax base.
 To stop that abuse, the Chancellor announced on Budget day a package of measures to tackle avoidance of stamp duty in commercial property transactions, and he also launched a major reform to modernise stamp duty on land and buildings in the United Kingdom. The package of measures will ensure that stamp duty is payable if a transfer artificially rests on contract, discourage the use of companies set up specifically to avoid stamp duty on UK property and stop the increasing exploitation of the existing stamp duty reliefs for company reorganisations. Those interim measures, ahead of the modernisation of stamp duty, will discourage a range of techniques currently used to avoid stamp duty on high-value property deals. Legislation will be included in the Finance Bill 2003 to reform stamp duty.

Mark Field: I am sorry to catch the Financial Secretary in mid-drift as she is espousing the clause. She referred to companies that are apparently not paying their share and to the modernisation of stamp duty. I am intrigued and would like some idea as to what she considers the correct or fair share that companies should pay in a tax that has, at least in its
 extent, become a considerably bigger burden on business in the past three or four years and how she envisages modernisation of the tax in the years ahead.

Ruth Kelly: I apologise to the hon. Gentleman and to the Committee for the fact that I was unable to be present this morning when the Opposition's new clause was debated. I understand that several points on the overall level of stamp duty were raised.
 I recently held meetings with the British Property Federation, for example, and made clear our support for the commercial property sector as a factor of production that contributes to the United Kingdom economy. It is right that we recognise its economic contribution to the economy, but it is completely unfair that we have a distortive tax that some players in the commercial property market pay and others avoid completely. We must have a level playing field and not discriminate against some companies in favour of others. 
 Clearly, we have set in train a major reform of stamp duty, which must first put all companies on the same basis and ensure that everyone pays a similar share of tax on stamp duty transactions. When we modernise stamp duty in the Finance Bill next year and set out a comprehensive reform strategy, we shall consider all the different interrelationships and so on. However, in the interim period we must ensure that we have a comprehensive plan to tackle stamp duty avoidance. It is completely unfair that some companies do not pay their share of tax while others pay the full rate. 
 The reform that we will include in next year's Finance Bill will build on the 2002 measures to tackle stamp duty avoidance, support the Government's e-business agenda and update the framework of stamp duty, bringing it into line with more modern taxes. The main reforms are set out in a consultative document published on Budget day, which seeks views on the detail of the modernised regime.

John Burnett: I hope that the thrust of the Financial Secretary's comments will be that it is fair enough to penalise artificial schemes for avoidance. However, there may be bona fide arrangements in place and, due to normal commercial eventualities, a charge to recover an additional charge to stamp duty on the director of a transferee company. When such entirely innocent events have occurred, that person should not fall within the charge.

Ruth Kelly: I will take the hon. Gentleman's comments as support for the Opposition amendments that have been tabled to introduce a motive test into the arrangements. I will come to those in due course. I have said that we are undertaking a comprehensive reform of the stamp duty regime, which we will implement shortly. In the interim period it is extremely important that we have comprehensive and effective anti-avoidance measures in place. I shall deal with the specific practicalities of introducing a motive test in that interim period in due course.
 Clause 109 aims to discourage companies from using corporate vehicles to avoid the property rate of 
 stamp duty. It is widely recognised that companies have been abusing the rules for stamp duty group relief by transferring UK land and buildings into special-purpose vehicles in order to sell the shares in that vehicle rather than the land and buildings direct. As the hon. Member for Arundel and South Downs pointed out, that has the effect that the sale of the land and buildings is charged at the stamp duty on shares rate of 0.5 per cent. or at nil if the special-purpose vehicle is incorporated outside the UK. 
 Such practice is a clear abuse of the spirit of the stamp duty group relief rules. They are not designed to provide relief where the intention is the sale of an asset outside the group rather than an intra-group transfer. There are already anti-avoidance rules within the stamp duty legislation that aim to prevent group relief from being claimed where there is an arrangement in place for the transferee company to leave the group. However, because companies are circumventing the existing rules, they are proving ineffective in combating widespread avoidance of the group relief provisions. 
 As a result of avoidance activity, the clause introduces a time limit into the legislation. From Budget day, that has the effect of clawing back the group relief already granted when UK land and buildings have been transferred intra-group, and the transferee company leaves the group within two years of that transfer. 
 The two-year rule applies to all intra-group transfers that include UK land and buildings. It is an interim measure to combat what can be described as the common practice of companies abusing the group relief rules to sell UK land and buildings within a corporate wrapper. By doing so, it ensures that the correct rate of stamp duty is paid on transfers of land and buildings. 
 Opposition amendment No. 224 to clause 109 inserts a motive test. I have already made it clear that it is not the Government's intention that the clawback of group relief should apply only when the transaction is motivated by stamp duty avoidance. The reform of stamp duty in 2003 will consider whether the withdrawal of group relief in a two-year period is still necessary. In the meantime, in light of the current abuse, the two-year time limit is necessary to prevent the sale of land and buildings outside a group from benefiting from the relief inappropriately. The same applies to amendment No. 225, which introduces an identical motive test for clause 111, which withdraws stamp duty relief for company reconstructions in similar circumstances. 
 Opposition amendment No. 226 inserts an identical motive test into clause 113. It is not the Government's intention that the introduction of a charge on contracts for UK land and buildings in excess of £10 million should apply only where the transaction is motivated by stamp duty avoidance. The reform of stamp duty in 2003 will include consideration of whether it should apply to all contracts. In the meantime, the clause tackles resting on contract for all large deals. 
 The hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs should consider the practicalities of introducing a complex motive test during the interim and ask themselves whether it would be simpler and more straightforward to have a two-year time period to tackle abuse. On those grounds, I urge the Committee to reject the amendment. 
 The hon. Member for Arundel and South Downs raised various points of detail, some of which will be dealt with later today. However, due to the levels of abuse currently prevalent, a strong response is needed. For some time, the specialist property press have been openly discussing avoidance techniques, which are becoming much more widespread. Our measures are interim, and we shall consider the two-year time limit in due course, when we consider fundamental reform. I deal with sub-sale relief later when we discuss clause 113, and some of the other detailed points about interest and so on that the hon. Gentleman raised. I urge the Committee to reject the amendment.

Howard Flight: The first point, which I made this morning, is that I hope that the Government realise that, for better or worse, taxation ultimately depends on a degree of consent. Most business organisations take the view that 4 per cent. stamp duty on commercial property—it is a substantial earner for Government, and I called it the new window tax—is unacceptable. I am told by the legal experts that a raft of anti-avoidance measures is waiting in the wings. Like so many other taxes, people will willingly pay them if they are reasonable, even though some clever accounts people will still try to avoid them. However, if they are unacceptable, it will inevitably cause the establishment of a massive avoidance industry. What the Government believe to be another wonder area to milk for tax will disappoint, and the excessive measures in that one narrow area will not have the revenue effect that the Government seek.
 Our amendments are narrowly about justice. I understand that it is much easier to have a cut-off two-year rule, but the reaction to that will inevitably be that businesses will endeavour as far as possible to stay within the limit, even if it is economically against their interests, because some degree of restructuring is pressing. However, they will not do deals that would break because of the tax that they could incur. The Government will not make money out of the measures, which will have an impact that is only marginally damaging economically. 
 My advice to the Government is that they should think again. On a number of occasions during the past five years, they have had what appeared to be jolly good ideas for raising a lot of tax that would not get noticed—and that caused a massive crisis in the pensions area. Doing that in the property area in the present economic climate would be economically unwise. One would be right to say that if stamp duty was reduced revenue would be lost, but I repeat that I believe that the Government will be disappointed by the resulting revenue.

John Burnett: I cannot remember whether the hon. Gentleman was a member of the Committee that considered the Finance Bill in 1998, but he may recall
 that substantial anti-avoidance provisions were included in that Bill. That was an example of the Government's being unable to catch up with wide-scale stamp duty avoidance. Two large transactions took place that year: British Petroleum and Vodafone both purchased shares in overseas companies, and both companies managed to avoid paying stamp duty. They saved themselves an enormous amount of money, notwithstanding that year's vast tranche of anti-avoidance legislation.

Howard Flight: I thank the hon. Gentleman for that intervention. I may not have been a member of that Committee, but I was certainly aware of the Vodafone situation. It is obvious that when taxes are unacceptably high, that is what happens. It becomes a nightmare for the Government, who must constantly try to keep up by blocking tax loopholes.
 I hope that the Government will have the sense in their statutory reforms to realise that stamp duty needs to be pitched at a level that is appropriate to the economic circumstances. We are not talking about housing stamp duty but, as the Governor of the Bank of England has warned, when interest rates go up, which at some stage they surely will, and the south-east housing market crashes, if stamp duty remains at 4 per cent. we shall have a dangerously illiquid market and a crisis on our hands. 
 I have no doubt that the Government will resort to doing what the last Conservative Government did and cut stamp duty to try to cushion the agony. It is a nice earner to have a rate of 4 per cent. when the going is good but one must be aware of the economic consequences when the going is bad. 
 In conclusion, we think that, for the specific purposes of clause 109, an anti-avoidance motive is justified. The Government will not give way and it is not worth putting the matter to the vote, but I hope that they will take heed of what I have said and what they will have found out for themselves from speaking to representatives of the industry and the legal profession. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 109 ordered to stand part of the Bill.

Schedule 34 - Stamp duty: withdrawal of group relief: supplementary provisions

Ruth Kelly: I beg to move amendment No. 238, in page 462, line 22, at end insert—
'Relief not withdrawn in case of winding-up 
 2A (1) Section 109 does not apply if the transferee company ceases to be a member of the same group as the transferor company by reason of anything done for the purposes of, or in the course of, winding up the transferor company or another company that is above the transferor company in the group structure 
 (2) For the purposes of this paragraph a company is ''above'' the transferor company in the group structure if it is the parent (within the meaning of the relevant group relief provision)— 
 (a) of the transferor company, or 
 (b) of another company that is above the transferor company in the group structure.'. 
For the record, I should set out the Government's intentions with regard to the amendments, as the Opposition have not had much notice of their content. Schedule 34 ensures that a clawback charge is not triggered if a transferor company leaves the group. However, we have been asked whether the clawback is similarly not triggered when the transferor company goes into liquidation. It is not our intention that the liquidation of the transferor company should give rise to the clawback charge. To address that point, Government amendment No. 238 ensures that group relief is not withdrawn where the transferor company leaves the group by way of liquidation. 
 That is the case whether the liquidation is that of the transferor company or a company that is above the transferor company in the group structure. 
 Amendment agreed to.

Ruth Kelly: I beg to move amendment No. 239, in page 463, line 10, leave out sub-paragraph (1) and insert—
'(1) If any duty payable under section 109 is not paid within the period of 30 days within which payment is to be made, interest is payable on the amount remaining unpaid.'.

Roger Gale: With this it will be convenient to take Government amendment No. 244.

Ruth Kelly: Amendment No. 239 addresses a point raised by representative bodies regarding the date from which interest runs on the clawback charge. We have listened to representations that claim that it is inequitable to apply interest from the date of the original intra-group transfer. Although this is an anti-avoidance provision, we are content that interest should apply only where the clawback charge itself has not been paid within 30 days of having been triggered. The amendment ensures that interest will apply only to any amount of the clawback charge that remains unpaid at the 30-day point.
 Amendment No. 244 achieves an identical effect for Schedule 35, which contains provisions for clawing back the relief for company acquisitions. It also addresses points put to me by representative bodies. I commend the amendments to the Committee. 
 Amendment agreed to.

Howard Flight: I beg to move amendment No. 169, in page 464, line 3, leave out paragraphs 7 and 8.

Roger Gale: With this it will be convenient to take the following: Government amendments Nos. 240 to 242.
 Amendment No. 170, in page 468, line 12, leave out paragraphs 8 and 9. 
 Government amendments Nos. 245 and 246.

Howard Flight: I hope that the Government amendments will address the points raised by our amendments Nos. 169 and 170, but I have not had the opportunity to digest them yet. Our amendments deal with issues raised by the Law Society of England and Wales. Subsections (7) and (8) of clause 109 and subsections (8) and (9) of clause 111 all impose a secondary liability on other group companies and controlling directors for clawback of stamp duty relief, which can arise inadvertently. The Law Society
 considers such a power to be excessive, wholly inappropriate and liable to create material difficulties with financing arrangements.
 Schedule 34 provides that, where group relief is withdrawn, a secondary liability could fall on a controlling director of the transferee company or any company that has control of the transferee company. There are no existing provisions under which the secondary liability for stamp duty is imposed, and in the Law Society's view, it is inappropriate to introduce the concept at a time when the stamp duty rules are about to be changed substantially, particularly as in the majority of cases, any withdrawal of relief is likely to have arisen entirely as a result of transactions that were not in the contemplation of the parties at the time of the original transfer. For example, if property had been transferred to a development company in the group without any wrongdoing on the part of the company, it seems grossly inequitable that, if the company became insolvent and was sold, a person who was a controlling director at the time of the original transfer could be held liable for any stamp duty that became due as a result. 
 If, notwithstanding the above comments, it is considered that provision for a secondary liability should be made, the Law Society's view is that, following a similar approach to that adopted in section 190 of the Taxation of Chargeable Gains Act 1992 in relation to UK companies, a secondary liability can be imposed only on a member of the group that has owned the asset in the previous 12 months. 
 I trust that the Government are already aware of the legal community's concerns on both counts. The clause 111 issue is that the use of the definition of control in section 416 of the Taxes Act 1988 is likely to lead to considerable uncertainty about whether the clause may result in the withdrawal of relief under section 76 of the Finance Act 1986. The Law Society recommends instead the definition of control set out in section 840 of the Taxes Act 1988. I hope that the Minister will be able to advise that what are considered to be moral measures, as well as definitional measures, will be limited by the Government's amendments.

Ruth Kelly: In the event that the transferee company fails to pay the clawback charge under clause 109, paragraphs 7 and 8 of schedule 34 will provide for the charge to be recovered from another group company or certain controlling directors. It is vital that those powers are included in the schedule, as they will allow the Inland Revenue to look to other persons, where the charge has been triggered by the transferee company but—for reasons of liquidation, for example—the charge cannot be recovered from the transferee company. So I cannot agree with the broad thrust of the argument made by the hon. Member for Arundel and South Downs.
 That type of recovery power is not unique. It has previously been used in legislation on the tax recoverable from another group company or controlling director in respect of corporation tax on chargeable gains. The clawback of stamp duty group 
 relief under clause 109 is an anti-avoidance measure, which aims to discourage the use of companies set up to avoid stamp duty. There is no reason why the charge should not be collected from other companies in the group or, indeed, failing that, from a controlling director. 
 Where the transferee company pays the clawback charge, there is no question that such provisions would be invoked. The provisions merely support the proper administration of the withdrawal of group relief provisions. However, I can tell the hon. Gentleman that the Government have listened to representations on the breadth of the companies from which the clawback charge can be recovered. As a result, we tabled Government amendments Nos. 240 to 242, which will limit the companies from which group relief is recoverable, in the event of non-payment by the transferee company, to the transferor company or any company that is above the transferee in the group structure. That answers concerns that the charge could be recovered from any company in the group, even if the company were not above the transferee company in the group structure, and it addresses the representations that have been made regarding real commercial constraints of the breadth of the recovery power. 
 I should add that Opposition amendment No. 170 and Government amendments Nos. 245 and 246 achieve the same effect for schedule 35, which contains supplementary provisions for withdrawal of relief on company acquisitions. The same reasons for rejecting the Opposition amendment and supporting the Government amendments therefore apply to schedule 35.

John Burnett: Is the limitation period for the recovery of tax on the withdrawal of group relief six years from the original transaction?

Ruth Kelly: The hon. Gentleman knows that clause 109 is an interim measure, to counter widespread avoidance before the introduction of a modernised stamp duty regime. The clawback charge is triggered when a transferring company leaves the group within two years of an intra-group transfer. That two-year provision is also translated to the limitation to which the hon. Gentleman refers, so it is two years from the original transaction, rather than the six years that he assumed. I hope that the hon. Gentleman is satisfied and I urge the hon. Member for Arundel and South Downs to withdraw his amendment.

Howard Flight: I am delighted that, in a slightly hidden way, the Minister has confirmed that the Government amendments have addressed the points at which both our amendments are directed. They are reasonable points, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendments made: No. 240, in page 464, line 12, leave out paragraph (a) and insert— 
'(aa) the transferor company; 
 (ab) any company that, at any relevant time, was a member of the same group as the transferee company and was above it in the group structure;'.
 No. 241, in page 464, line 17, leave out 'this 'purpose' and insert 
'the purposes of this paragraph— 
 (a)'.
 No. 242, in page 464, line 19, at end insert— 
'(b) a company is ''above'' another company in a group structure if it is the parent (within the meaning of the relevant group relief provision)— 
 (i) of that company, or 
 (ii) of another company that is above that company in the group structure.'.—[Ruth Kelly.] 
Schedule 34, as amended, ordered to stand part of the Bill. 
 Clause 110 ordered to stand part of the Bill.

Clause 111 - Withdrawal of relief for company acquisitions

Question proposed, That the clause stand part of the Bill.

Howard Flight: Without repeating the points, we have the same territories of concern that I articulated in relation to clause 109. We shall not vote against the clause, but we ask the Government to take note of the points that we raised on that clause in this context also.

Ruth Kelly: Of course we take note of debate in Committee. Clause 111 is another element of the anti-avoidance package. It aims to prevent companies from using corporate vehicles to avoid proper rates of stamp duty. I shall not rerun the debate that we had on the previous clause, but I ask the Committee to support it.

Howard Flight: The arguments will wait until starred new clause 19 comes up. However, we have put down a marker—it is relevant to this clause as there is a logic in the Government's capital gains tax exemption measures for the disposal of substantial shareholdings—to argue that there should be a parallel stamp duty exemption meeting the same point. That is what the clause is about.
 Question put and agreed to. 
 Clause 111 ordered to stand part of the Bill.

Schedule 35 - Stamp duty: withdrawal of relief for company acquisitions: supplementary provisions

Ruth Kelly: I beg to move Government amendment No. 243, in page 467, line 20, at end insert—
'Change of control due to interest of loan creditor 
 4A (1) Section 111 does not apply by reason of control of the acquiring company changing as a result of a loan creditor becoming, or ceasing to be, treated as having control of the company if the other persons who were previously treated as controlling the company continue to be so treated 
 (2) In sub-paragraph (1) ''loan creditor'' has the meaning given by section 417(7) to (9) of the Taxes Act 1988.'.
 Schedule 35 contains a number of sets of circumstances under which the clawback of section 76 relief is not allowed when there is a change of control. However, we have received representation 
 concerning the change of control due to the interest of a lone creditor. It was not the intention to trigger the clawback charge in circumstances in which control of the acquiring company changes because a lone creditor comes to be or ceases to be treated as having control, provided the original shareholders still control the acquiring company. The amendment therefore ensures that section 76 relief is not withdrawn in such circumstances. It addresses points that have been made to us by representative bodies, so I commend it to the Committee. 
 Amendment agreed to. 
 Amendments made: No. 244, in page 467, line 22, leave out sub-paragraph (1) and insert— 
'(1) If any duty payable under section 111 or this Schedule is not paid within the period of 30 days within which payment is to be made, interest is payable on the amount remaining unpaid.'.
 No. 245, in page 468, line 22, after 'company' insert 
'and was above it in the group structure'.
 No. 246, in page 468, line 32, at end insert— 
'(aa) a company is ''above'' another company in a group structure if it controls— 
 (i) that company, or 
 (ii) another company that is above that company in the group structure;'.—[Ruth Kelly.]
 Schedule 35, as amended, agreed to.

Clause 112 - Penalties for late stamping

Howard Flight: I beg to move amendment No. 171, in page 90, line 12, leave out subsection (3).
 As members of the Committee will be aware, at present it is possible to avoid stamp duty if the documents involved are executed outside the United Kingdom. Until the Budget, the deadline for stamping such a document if it was brought into the UK was 30 days after it was brought in for the purposes of penalties. That was changed in the Budget, with effect from Royal Assent, so that penalties will be levied 30 days after the date of execution, irrelevant of where the document has been executed. 
 As we are talking about an anti-avoidance measure, there is little critical that can be said. However, tax experts are looking for some clarification about the fact that subsection (2) uses the words ''relate'' and ''relates'' but subsection (3) uses the word ''involves''. We would welcome clarification as to whether a distinction is intended. 
 The amendment is from the Law Society, and seeks to ensure that contracts only incidentally related to land for the sale of worldwide businesses, for example, are not accidentally caught by the new provisions of the clause.

Ruth Kelly: The clause is another element of the anti-avoidance package. It aims to discourage the avoidance of stamp duty by the offshore execution of documents relating to UK land and buildings. The current practice of executing documents offshore ensures that, if the document is ever needed in the UK, a penalty for late stamping only runs from 30 days after the date when the document entered the
 UK. That is not in line with the penalty regime for documents executed in the UK, where a penalty for late stamping runs from 30 days after the date of execution.
 To tackle that variance, the clause extends the onshore penalty regime to the offshore execution of documents relating to UK land and buildings. From Royal Assent, the time limit for stamping those documents will be the same regardless of the place of execution. Subsection (3) ensures that every document that relates to a transaction that to any extent involves land in the UK is included in the extended penalty regime. 
 The amendment would limit the extended penalty regime to documents that related only to land in the UK. That would mean that another type of property could be included in the document, merely to ensure that the document would not be caught by the new rules. That would undermine the whole effect of the measure, as it would allow the make-up of instruments to be manipulated in order to remain outside the extended penalty regime. 
 The clause, including subsection (3), removes the protection of offshore execution for documents that transfer UK land and buildings. It is consistent with the Government's overall approach to tackling anti-avoidance. Therefore, I urge the hon. Gentleman to withdraw the amendment, or the Committee to reject it.

Howard Flight: I shall go into greater detail. The Law Society pointed out that the Budget day press release advised that the new provisions relating to penalties for late stamping applied to agreements for the transfer of land, but the proposed legislation goes further than that. New section 15 B of the Stamp Act 1891 applies the new rules to every instrument that relates to a transaction that to any extent involves land in the United Kingdom. The effect may be that, when an agreement is entered into for the sale of a business that does not relate to land and there is a separate agreement for the sale of the land, the new penalty rules will apply to an agreement for the sale of the business because it relates to a transaction that to some extent involves land. Is that what is intended by the Bill? If so, it is not in accordance with the Budget announcement.
 The Law Society's view is that new subsection (1)(a) is unnecessary and should be deleted, which would mean that the new penalty rules would apply to any instrument that relates to land in the United Kingdom. The Law Society's view is that the meaning of the words would then be clear and would not cause the new rules to apply to an agreement which, while relating to a transaction in connection with land, did not relate to the land itself. We are merely seeking the confirmation, which I thought I saw the Minister giving, that the clause does not do what the Law Society fears that it does.

Ruth Kelly: I am aware of the criticisms and worries that have arisen in relation to the clause. Applying the revised penalty regime only to instruments relating to
 land in the United Kingdom would have allowed those companies and individuals who wanted to execute avoidances offshore to do so without facing a stamp duty penalty. The clause is phrased so as not to catch free-standing transfers of assets that do not involve United Kingdom land. It protects transfers of debts, for example, from falling under the new penalty regime, while ensuring that those transfers that involve land come under the new rules.

Howard Flight: I thank the Minister, but I am still not clear what she is saying, because she has not answered my specific question. Two agreements may happen in parallel, one agreement for the sale of land owned by a pension fund and the other for the sale of a business owned by someone else, for example. Will the new penalty rules apply to the sale of the business when the business relates to land being sold at the same time? I think that the Minister is saying that they will not apply, but her words were unclear. This probing amendment seeks clarity on the matter.

Ruth Kelly: I understand the hon. Gentleman's point. He seeks an understanding from the Government as to whether a deal involves or includes United Kingdom land, and what the relationship is between the two. It is my understanding that if the transfer of business includes United Kingdom land, that does not come under the new subsection, which is drafted in such a way as to ensure that free-standing transfers of assets that do not involve United Kingdom land are protected from the new measure.
 On the point that the hon. Gentleman raises about whether land is included in the transaction, clearly the measure must apply if the transaction includes United Kingdom land. [Interruption.] I hope that the hon. Gentleman will allow me to write to him on the specific point of the interrelationship between two different deals, one of which includes United Kingdom land while the other does not. However, it is a minor point and the legislation is relatively clear.

John Burnett: I am grateful to the Financial Secretary for giving way. The point that I make actually arises fairly frequently because of the problem of the stamp duty charge. I should be grateful for a copy of the letter that the hon. Lady proposes to write in clarification.
 There may be a transaction and two agreements, one relating to land and the other to business assets other than land when the business is carried on on the land. It would be welcomed if the Government would explain to the Committee in due course that the second agreement relating not to the land but only to the other assets of the business is not caught by the charge.

Ruth Kelly: I will certainly consider the points that have been raised and will circulate a letter to Committee members so that the matter is absolutely clear.

Howard Flight: The hon. Member for Torridge and West Devon may have explained with even greater legal clarity than I could what the amendment is all about. It is clear what we and the Law Society are seeking. As stated, the purpose of the amendment is to ensure that in the situation described by the hon.
 Gentleman, which I also described, business assets that are not land and subject to a separate contract will be covered by the new penalty provisions. The reason for lack of clarity is that if the land and property subject to separate contracts are used by the business there is an argument that they would be caught because they relate to it. I look forward to clarification of the issue but if it comes back the other way, we may want to raise it on Report. In the meantime I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Clause 113 - Contracts for the sale of an estate or interest in land chargeable as conveyances

Howard Flight: I beg to move amendment No. 118, in page 90, line 21, leave out subsection (1) and insert—
'(1) This section applies to a contract or agreement for the sale of an estate or interest in land in the United Kingdom where— 
 (a) at the time the contract or agreement is made or at any time thereafter while the contract or agreement is capable of completion by transfer of the legal estate to the purchaser or to any person nominated by the purchaser, the legal estate is vested in a nominee or trustee and the sole or main benefit that may be expected to accrue from the separation of the legal estate from the beneficial interest is the deferral or avoidance of a charge to ad valorem stamp duty, and 
 (b) the amount or value of the consideration exceeds £10 million or the instrument forms part of a larger transaction or series of transactions in respect of which the amount or value, or aggregate amount or value exceeds £10 million.'.
 The Chartered Institute of Taxation commented that the clause constitutes a major extension of the tax base, which is being slipped in without attention being drawn to it. It kills subsale relief, which has existed since 1782. Pitt introduced that statutory relief and it is now contained in section 58(4) and (5) of the Stamp Act 1891. It limits the stamp duty payable when property is on-sold, either in whole or in part, to a sub-purchaser so that, subject to anti-avoidance, stamp duty is paid only once according to the consideration paid by the sub-purchaser. 
 Clause 113 will block subsale relief following Royal Assent when the consideration for the sale of property exceeds £10 million—that is, around £8.5 million plus VAT—by imposing a stamp duty charge on the initial sale contract. It is argued that the clause, subject to what I am describing being a correct understanding of it, represents an overreaction to the need to block the split legal and beneficial title avoidance scheme. That is no doubt the aim, which could have been addressed more efficiently with a clause denying the exemption from stamp duty for property sale agreements when the legal title is held separately and it appears that the purpose, or one of the main purposes, in so doing is to defer or avoid the payment of ad valorem stamp duty on a sale of the beneficial interest. 
 The blunderbuss approach will close off a relief that has existed for some 200 years and plays an important role in facilitating the efficient operation of the commercial and residential property market in Britain. Typical uses of subsale relief include the house-building business when land is acquired by developers and then subsold to customers with a completed building erected. Any denial of subsale relief will tend to lead to house price cost inflation as 
 developers inevitably pass on the cost of their stamp duty in the price charged to customers, which will bear stamp duty on the sale of the house. In addition, the commercial property sector, both private and public, is increasingly moving towards outsourcing, which often involves sales and leasebacks. To achieve necessary rates of return and to finance further purchasing, a leaser may invest on contract and in due course parcel up surplus land to sell on to investors and developers using subsale relief to limit the total stamp duty to one hit on the price from the sub-purchasers. Again, general experience is that some outsourcing sale and leaseback proposals may not be economically viable if a stamp duty double hit arises on both the initial restructuring and the intended on-sale. 
 There is therefore a strong case in favour of recognising the important and valuable role that property intermediaries play in promoting the better and more efficient use of property through outsourcing and investment structures that enable an existing user better to utilise a smaller proportion of their estate while releasing surplus land for more efficient utilisation by others. Stamp duty subsale relief encourages that sort of better utilisation and recognises that the intermediary in such situations should not properly bear their own stamp duty on the grounds that it effectively provides liquidity and promotes the more efficient utilisation of property, which is in scarce overall supply. Procedure exists for such a release in the exemption from stamp duty in section 88 of the Finance Act 1986 for the sales of shares to stock exchange intermediaries. 
 If it is not possible for the Government to recast clause 113 in terms of a specific blocking of the split scheme, which I assume that it is intended to do, it should be amended to preserve subsale relief and the new charge on sale contracts in excess of £10 million should not apply where the purchaser is a property intermediary. That term would need to be defined more precisely after consultation, but would broadly equate to commercial property and investment professionals who acquire property in the course of their business activities, which include sales, leasebacks, property development and refurbishment. 
 Amendment No. 118 seeks to deal with that territory. Specifically, rather than recasting clause 113 to include a specific lock-in, it follows the route of ensuring that subsales would be preserved and the new charge on sale contracts in excess of £10 million would not apply where the purchaser is a property intermediary. I do not know whether Government amendment No. 247, which I have not yet had a chance to see, addresses the point, but I hope that it will. The clause will undermine subsale and there will be both undesirable knock-on economic effects and unfairnesses.

Ruth Kelly: Clause 113 is another element of our anti-avoidance package. It aims to discourage companies from deliberately not completing large deals in land and buildings to avoid paying stamp duty.
 Property transactions have two stages—contract followed by completion—and stamp duty normally applies on completion. Companies have been using contracts, which they believe are not stampable under existing legislation, to transfer ownership of land and buildings by resting at the contract stage and not completing the transaction in the ordinary way. That is clearly an artificial means of transferring land and buildings that is not generally available to individuals who traditionally complete the transaction, for example when they buy a house, and pay stamp duty. 
 To tackle that practice, the clause brings contracts for the sale of interests in land and buildings with a consideration of more than £10 million into charge. From Royal Assent, that will ensure that for high-value deals in land and buildings stamp duty is payable where a transfer rests on contract. It should be clear that although the type of stamp duty avoidance described in amendment No. 118, which is commonly described as title splitting, is indeed one of the forms of stamp duty avoidance tackled by clause 113, it is by no means the only form of avoidance that the Government are addressing in the clause. 
 Amendment No. 118 would not therefore cover the avoidance that the Government are combating. It would undermine the spirit of the clause and allow companies to continue to rest on contract as a means of avoiding stamp duty. For those reasons, I cannot recommend that the Committee accept the amendment. 
 We have carefully considered the point about subsale relief made by the hon. Gentleman and other representative bodies. I make it clear that we did not intend clause 113 to remove the benefits associated with subsale relief, and forthcoming amendments will put that beyond doubt. In broad terms, where a contract or contracts is or are within the scope of the clause but a subsequent conveyance attracts stamp duty, subsale relief will be available in the ordinary way. I hope that hon. Members will appreciate our intention to introduce Government amendments in due course. I urge the hon. Gentleman to withdraw his amendment.

Howard Flight: I am delighted to hear that the Government have taken up the subsale point. I am slightly disappointed that they have not focused on it before, given its antiquity, but it is important that they do so now. The easiest example of its importance relates to builders breaking land into plots and selling it on. On the basis that the Financial Secretary said that on Report subsequent amendments would be made to protect subsale, I beg to ask leave to withdraw the amendment.
 Amendment, by leave withdrawn.

Howard Flight: I beg to move amendment No. 172, in page 90, line 23, leave out 'the consideration' and insert
'so much of the consideration as is attributable to the estate or interest in land'.

Roger Gale: With this it will be convenient to take Government amendment No. 247, in page 90, line 26, after 'value,' insert
'of the consideration attributable to land in the United Kingdom'.

Howard Flight: Without revisiting the territory, amendment No. 172 would specifically ensure that the clause applies only to sales of land of more than £10 million, and not to land sales that are only a small part of the transaction that exceeds that amount. The Law Society raised that point.
 Press releases on the Budget indicated that the new charge would apply only where the consideration for the land concerned was in excess of £10 million. However, the legislation goes beyond that. The effect of the clause will be that an agreement on the sale of a business with non-land assets of £9 million and land assets of £2 million will be subject to stamp duty as though it were a conveyance on the sale; because the agreement would be for the sale of an interest in land, together with other assets, the instrument would form part of a transaction in which the value exceeded £10 million. I do not believe that that was the Government's intention; it is certainly not what they said that they would do, which is the reason for the amendment. Perhaps Government amendment No. 247 covers the same point. I look forward to the Financial Secretary's response.

Ruth Kelly: It is unusual in forums such as this for the Government to recognise the case made by the Opposition. I am delighted to say that the case put forward by the hon. Member for Arundel and South Downs was indeed persuasive.
 The Government intended clause 113 to apply only to contracts where the consideration of the land and building exceeded £10 million. I therefore recommend that the Committee accept the amendment. For the sake of completeness, I should like the Committee to accept Government amendment No. 247, which ensures that the effect of the amendment No. 172 is carried through the rest of clause 113.

John Bercow: This is a memorable occasion, the significance of which none of us on the Committee should understate. I am conscious that celebrated members of the Committee have considerable experience of earlier Finance Bills. There is very little new in government, and much continuity, so I do not wish to exaggerate the case. Neither, however, do I wish the extent of the achievement of my hon. Friend the Member for Arundel and South Downs to be understated. In that context, is the Financial Secretary aware of the most recent precedent for his achievement?

Ruth Kelly: I thank the hon. Gentleman for his contribution. While it is unusual for the Government to recognise the case made by the Opposition, I think that the hon. Gentleman now realises that that is not unique. An Opposition amendment was indeed accepted only recently, during the course of this Finance Bill. On the grounds that I have set out, I encourage the Committee to accept the Opposition amendment and Government amendment No. 247.

Howard Flight: Which does what?

Ruth Kelly: It extends the hon. Gentleman's point through the entirety of the clause.

Howard Flight: What can I say? Many thanks. I am pleased that this important point has been taken on board. Without banging on about it, I think that the whole territory of changing stamp duty is quite tricky. When we debated other clauses our points, although comprehensive, were not always accepted. I am pleased that the Government have seen the point here.
 Amendment agreed to. 
 Amendment made: No. 247, in page 90, line 26, after ''value'', insert— 
''of the consideration attributable to land in the United Kingdom''.—[Ruth Kelly.]
 Clause 113, as amended, ordered to stand part of the Bill.

Clause 114 - Abolition of duty on instruments relating to goodwill

Howard Flight: I beg to move amendment No. 173, in page 91, line 33, at end insert—
''or ordinary trade debts as defined in paragraph 35(5) of Schedule 16''.
 What we have learnt is that goodwill is good and property is bad, but we welcome the abolition of duty on goodwill and the announcement that property other than securities and land will be exempt from stamp duty towards the end of 2003. That policy decision having been taken, we ask why the assets that can now easily be taken out of the net of stamp duty should not be taken out now, instead of after a delay of over a year. In particular, the clause effectively recommends that the transfer of book debts should be immediately exempt from duty. A suitable definition of ''book debts'' can be found in paragraph 35(5) of schedule 16. The essence of the point is, why not introduce that measure now?

Ruth Kelly: Under clause 114, stamp duty charges on transfers of goodwill are abolished with effect from 23 April 2002. That puts goodwill into the system used with intellectual property, which we exempted from stamp duty in the Finance Act 2000. The goodwill exemption benefits businesses by removing the stamp duty charge when they are bought and sold. I am glad that the hon. Gentleman recognises the strength of the case that we are making for that exemption. The measure is a response to representations, both concerning stamp duty and following a wider consultation on corporation tax on intellectual property, goodwill and other intangibles.
 As we announced when consulting on stamp duty modernisation, we intend to revise the scope of stamp duty in future so that it focuses on interests in land and excludes not only intellectual property and goodwill but receivables. We therefore understand the case for the exclusion of debt, partially covered by the amendment, but we intend to do that in a proper and coherent fashion in the context of a full examination of the scope of stamp duty under modernisation. 
 The amendment is incomplete in what it would achieve, seeking as it does to exempt ordinary trade debt but not receivables in a wider sense; for instance, packages of debt used to underpin an issue of bonds. The definition of ''ordinary trade debt'' in schedule 16 is not suitable for our purposes, as we intend to deal with debt more broadly. The wider exemption of receivables will be achieved most appropriately by giving all types of debt our full consideration, with reference to the revised scope of stamp duty under modernisation. Therefore, I urge the hon. Gentleman to consider withdrawing his amendment.

Howard Flight: I would have liked the Financial Secretary to address the debt issue a little more than she did. We are pleased by the general thrust of clause 114. There is a technical matter that might better be pursued later, and perhaps the Law Society's concerns are not correct; therefore, I do not want to put the amendment to a vote. I am not entirely happy that my point has been fully resolved but, in the light of what the Financial Secretary has said and further discussion, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 114 ordered to stand part of the Bill. 
 Schedule 36 agreed to.

Clause 115 - IHT: rate bands

Question proposed, That the clause stand part of the Bill.

Michael Jack: I rise to ask the Financial Secretary some questions about current Government thinking on inheritance tax. I am delighted that the Government have proceeded on the basis of indexing inheritance tax rates. Others who contribute to the discussion may give more information on the effect on the private estates of individuals who have modest means, other than the fact that they live in London or the south-east. Such individuals may find that they creep—or march headlong—into inheritance tax as a result of the rapid rise in house prices that has occurred in this part of the world recently.
 That brings me to my first question. We have not had in the House of Commons for some considerable time a proper debate about the effect and, if I may say it from the Back Benches, the legitimacy of inheritance tax. The Government will, no doubt, invite us to agree to the enhanced limit of £250,000. Why do they think that that is the right figure, bearing in mind the point that I have just made? A property owned by someone who lives in a modest Georgian terraced house in London SE11—the London borough of Lambeth, which is not known for its property activities—could well be worth two or even three times the amount that is currently allowed under inheritance tax. That is not a fault of the individual who lives in such a property but is a consequence of the marketplace.

John Bercow: I appreciate the potency of my right hon. Friend's example. May I offer him another, as he
 develops his argument? Does he agree that the trap would also apply to someone who owns a one-bedroom flat in the London borough of Westminster? Several Members of Parliament from all parts of the House would fall into that category. In that context, it is only right that I declare an interest, as I own a two-bedroom flat in Westminster. Does my right hon. Friend agree that neither of us could automatically be considered wealthy in any sense?

Michael Jack: I take my hon. Friend's point. That raises the interesting issue of whether people who earn just over double the national average wage now could later find themselves in the realm of inheritance tax. The reason I mention that and the reason why I put it in the terms that I did at the start of my remarks is that this tax is a hangover from the days when taxes on incomes were sparse and taxes on capital were the way that the Inland Revenue got at people's income, which was bound up in assets. That is also the historical background of stamp duty. It was only at the point at which an asset was realised that the Revenue could find a way of getting a share of an individual's income.
 Those days are gone and individuals are now taxed in many different ways. People of modest means, such as those described by my hon. Friend the Member for Buckingham (Mr. Bercow), could accumulate the wealth that now would ultimately be subject to inheritance tax—notwithstanding the increase to £250,000—through, for example, paying a mortgage over 25 years out of their already taxed income. They now pay such mortgages without the benefit of mortgage interest relief at source. 
 Income that has already been taxed once is effectively taxed again in this context. Wealth in an estate could also have been accumulated through wise savings or investment. No post-war Government have disagreed with that; in fact, they have all encouraged people to save. The current Government have had mixed or negative success in that respect, whereas the previous Government were rather better at it. Either way—

Jim Cunningham: Will the hon. Gentleman give way?

Michael Jack: If I can finish this point I will be delighted to give way to the hon. Gentleman.
 Those who have accumulated part of their estate through savings might also, on the way through, have faced capital gains or other taxes on the dividend or other income from those savings. Inheritance tax seeks to grab hold of some of that money, which has potentially already been heavily taxed en route.

Jim Cunningham: The right hon. Gentleman said that this was an old form of taxation, but I remind him that when his party was in government it did not do very much about inheritance tax. Given that he questions the formula, I should have thought that he would have done something about it when in government. However, I have some sympathy with what the right hon. Gentleman is saying. There is an argument for inheritance tax to be adjusted, because
 values are changing through mortgages and that sort of thing, so I accept that his argument has merit.

Michael Jack: I am grateful for the hon. Gentleman's support and I accept it in the spirit that it was offered. His implied criticism was that the Conservative Government did not do what they could have done. They did in fact over-index the level of inheritance tax on a number of occasions.
 This is one of those matters that we should reconsider from time to time. We need to consider whether we need it and to examine the justification behind it. My argument is that people of modest means could find that, for those who succeed them, the final accumulation of their hard work and efforts as home owners and savers is once again to be taxed, and at a penal rate of 40 per cent., once they have passed from this planet. 
 We must re-examine the issue, because there are ways round this tax. When the Minister replies she will no doubt quote the latest figure from the Treasury to show that, with a threshold of £250,000, probably 1 or 2 per cent. of estates will be affected by the tax. However, surely the perceptive Minister would ask, ''If the tax is 98 per cent. out and only 2 per cent. in, how can that be?'' Quite a few outside London and the south-east might escape because their biggest single asset is their house. However, part of the reason that those figures are as they are—

Peter Luff: My right hon. Friend is underselling his case. In Edinburgh, for example, house prices have risen very sharply. In areas of the west midlands, £240,000 or £250,000 is not an unusual price for a property.

Michael Jack: I am grateful to my hon. Friend for intervening on me. I do not claim an expertise on the property market outside of my constituency or where I live in London. My hon. Friend makes the case that what may be today's low percentage could develop into a much higher percentage, but I want to develop the argument.
 People can circumnavigate inheritance tax by a variety of entirely legitimate means. If they are busy finding ways round it, and they can do so relatively easily—so far, the Treasury has thankfully not moved to affect the law on gifting—it surely raises the question of what the whole complex mechanism is about. The Financial Secretary will be aware of the complexities and expense not only of avoiding inheritance tax but of other matters connected with probate, valuation and all that goes with it. A case can be made for a thorough examination of the tax. 
 The United Kingdom is facing a crisis with respect to retirement income. For some people, the resources that are left to them will be crucial; one generation should be able to help the next live in some degree of comfort. Therefore, an argument can be made for a further review of the £250,000 limit proposed in the clause. Perhaps it should be raised to ensure that the accumulated wealth of individuals can be left to others to do the further job of ensuring that, at a time when retirement income is under particular pressure, families can pass sufficient money from one generation to the next to help the succeeding 
 generation to live a reasonably comfortable life. It is about passing on wealth from one generation to the next. 
 I hope that the Financial Secretary will explain the legitimacy that the Treasury sees in inheritance tax, as it now potentially affects a lot of people on modest incomes. I hope that she will explain why the Treasury adjudges £250,000 to be the right number. I should be grateful also if she would explain why, at this juncture, the Treasury does not seem minded to go beyond the present rate of indexation for that tax.

Mark Field: May I say how much I am in sympathy with the comments of the hon. Member for Coventry, South (Mr. Cunningham) in relation to my own party's record on inheritance tax. It is an immoral tax and it should be abolished—something that I believed long before being elected to Parliament. It may be easy for a new Conservative Member to say that, but those who were not in Parliament prior to 2001—or, indeed, prior to 1997—can dissociate themselves from that statement. I appreciate that it was not the top priority during the Conservative Government's last term; it might have been misconstrued had the better Conservative instinct to abolish that iniquitous tax come into play.
 Ultimately, as my right hon. Friend the Member for Fylde (Mr. Jack) pointed out, inheritance tax is double taxation. The concept of inheritance tax came about at a time when there was either no income tax or it was charged at a very minor rate. About 200 years ago, income tax was levied only at times of war, and it would go into abeyance thereafter. I am concerned, as I said in our debate on stamp duty, that it is part and parcel of Government policy. Inheritance tax may have been raised by a derisory level—it may be more than the level of inflation, but it is clearly considerably less than the increase in the cost of housing, which is surely the relevant inflationary factor—but it is evidently part and parcel of a policy that could also lead to doing away with the seven-year rule. That will doubtless be presented as the modernisation of inheritance tax, just as the modernisation of stamp duty allows the imposition of greater taxes on property owners. It is part of a long-standing agenda. The Government have obviously realised, especially post–1997, that income tax is no longer a viable means of redistribution, so they will use every other means available to achieve that. Clearly, inheritance tax is part of their armoury. 
 There is little doubt—my right hon. Friend the Member for Fylde put this eloquently—that the measure will penalise people in London and the south-east in particular. It seems absurd that a modestly priced property, worth £250,000—I accept that that may seem a large sum of money in many other parts of the United Kingdom—will result in inheritance tax being levied on the death of both spouses. My right hon. Friend referred to passing assets from one generation to the next. I suspect that that is what the Government object to, and that we shall see more measures introduced in years to come as part of their agenda to modernise property tax to ensure that less and less can be passed from one 
 generation to another. There is, however, a suicidal aspect to that approach, because while uncertainty remains in the financial markets and in other instruments, such as pensions, more and more money is being put into commercial property, especially by the younger generation. That should, perhaps, be discouraged, although I am not sure that it is the Government's role to do that. Many of my younger constituents eschew the idea of buying a pension, shares or other financial instruments and, instead, rush into investing in the property market, which has lead to its unhealthy overheating. 
 I worry that, behind the modest-looking provision in clause 115 lie the first steps towards some radical changes in the inheritance tax regime. I suspect that, in the next few years, the Government will think about ending the full capital gains tax exemption on a primary residence. We may see the idea of a European-style annual tax on property holdings being floated as part and parcel of the modernisation of the stamp duty or inheritance tax agenda. Hopefully, we shall have an opportunity to argue against that forcefully in due course.

Chris Grayling: I echo the calls for a more detailed examination of the role of inheritance tax in our society. The hon. Member for Coventry, South referred to the actions of the previous Conservative Government, but we face a very different situation today, in terms of both demographics and the pensions industry. There is no longer a concrete future with respect to provision for elderly people. As their numbers increase and as we continue to experience relatively low inflation and stock market problems, and as more and more final salary pension schemes disappear, the challenge of making proper provision for old age becomes greater. The use of inheritance tax planning and the modification of inheritance tax may provide a vehicle for passing wealth from generation to generation to act as an alternative form of pension provision. It is statistically likely that one's parents' generation are no longer around when one reaches retirement age. If they pass on their wealth and property, that may provide a core bedrock of provision in old age.
 I suspect that the Government regard inheritance tax as a cash cow. It must be nice for them to see house prices going up, year by year, and more and more estates falling within the inheritance tax provisions, providing more and more money to be spent on other things, but that is a narrow view. The Government now have the option of considering how to sort out the pensions situation for the future.

John Bercow: Given that the Government propose an increase of 3.3 per cent. in the threshold, when, according to the Halifax, house price inflation is running at 18.5 per cent., does my hon. Friend agree that the Government owe us an explanation as to which of three possible scenarios describes their position on the matter? Do we not need to know whether the Government intend more property owners to be brought into inheritance tax, whether they expect house price inflation to be reversed or reduced, or whether they are less optimistic in their prognosis for inflation than the Chancellor has led us to believe?

Chris Grayling: I would be as interested as my hon. Friend to hear the Government's response to those issues. I suspect that they see an opportunity to levy another stealth tax, and so to provide a valuable source of revenue by bringing more estates into inheritance tax year by year. Even if house price rises slow down in the future, they are likely to continue to rise over time in line with at least average earnings. Therefore, if the threshold on inheritance tax continues to increase year on year at a rate less than the rise in average earnings, by definition, more and more estates will be brought into inheritance tax every year.
 Pensions are only one aspect of the matter. The Government are completely missing another, which is the payment for residential, care and nursing homes in old age. Levying increasing levels of inheritance tax is likely to end up costing the Government money. If they tell the average family in many parts of the south-east, where such sums will be inherited from parents, that they must look at inheritance tax planning to ensure that they do not pay a large chunk of their parents' wealth to the tax man, those families will try to reduce the size of their parents' estate while they are still alive. That may well mean giving away the principal property. It may mean giving the maximum allowable under law, year by year. 
 People will have to make a judgment. If they have elderly parents in nursing homes, they do not know whether they will be there for only a year or two. The average time spent in a nursing home is as little as 18 months, but many residents live there for much longer. If the Government encourage people to run down their wealth to save inheritance tax, there is a risk that people who spend longer in nursing homes will have to have the bill for their care picked up because they no longer have the money to pay it themselves. 
 I do not think that the Government have fully thought through the implications of the measure. They regard it as a cash cow, but they miss the obvious point that it could contribute to a solution to the pensions issue. They miss the fact that they may end up picking up the bill themselves when elderly parents are in nursing homes for several years. 
 Why is inheritance tax levied at 0 per cent. or 40 per cent? To the best of my knowledge, it is the highest marginal rate of tax in the tax system. I can think of no other example in which there is a jump of greater than 40 per cent. Why on earth is a single rate set at the highest rate of income tax? Why do we not have a more graduated rate if the Government want to levy the tax fairly?

John Bercow: My hon. Friend makes a powerful point in any case, but does he agree that it would be even stronger if it were to transpire that many of those liable to inheritance tax and obliged to pay it at the rate to which he referred did not pay higher rate tax on their normal incomes? I do not have the figures with me to know whether that is true.

Chris Grayling: I thank my hon. Friend for that important point. Moreover, some of those who inherit properties from elderly parents may be entering or
 approaching retirement, so may not be on a substantial income.
 Although the Government will see the measure as a logical annual progression, they should tell the Committee what they plan to do with inheritance tax in the future and give full consideration to a proper review of the role of the tax and the contribution that it could make to some key issues.

John Burnett: I should like to make one or two other points about the impact of inheritance tax, on not only the economy of the country but the social aspects of people's lives, especially given the significant rise in asset values. That rise far exceeds the lower limit provided for in clause 115 and other lower limits.
 Before I entered the House, I was an adviser on taxation matters to individuals. Even five years ago, I detected an unhappy state of affairs within families. Significant pressure was put on older people to make potentially exempt transfers—far too early and of the wrong assets. I refer particularly to people's main residences. I have always taken the view that people should own and control their main residence, if possible until the day they die. They need that for their independence. These days, pressure is exerted on older people to make gifts of equitable interests, of their main residence or of the entirety of their main residence in order to start the seven-year period running. It can be corrosive of family relations if individuals are constantly being persuaded to make such gifts. The elderly should not be put under that pressure and they should retain their independence. It is an unhappy state of affairs, and brothers and sisters can fall out as well as parents and children. I hope that the Minister will let us have an idea of the Government's philosophy and their intentions with regard to the tax. How do they see it evolving and what will its future be?

Peter Luff: I should declare an interest. I have a modest terraced property in addition to my main residence. I rent it on an assured tenancy and have, therefore, known income from it. Without taking away from the comments of my hon. Friends, I want to defend the Minister. She proposes an increase in the threshold above the rate of inflation. It is only a modest one, but it is there and I would not want her to demolish my hon. Friends' arguments, with which I entirely agree, by claiming to be over-indexing. That would not be an adequate response to the powerful points made.
 The housing market is in the process of change. My hon. Friend the Member for Epsom and Ewell (Chris Grayling) made the potent point, which the Minister should address in her concluding remarks, that over time the housing market tends to increase by the rate of earnings growth, not that of the retail price index. Now that the value of their residences is the principal component in most people's estates, the logic is to index inheritance tax in line with earnings and not with the retail price index. That important point is made more powerful by the fact that more people are now buying houses to rent—buy-to-rent mortgages are common—because they are fearful of their pension provision. That is inflating house prices by more, in a secular way, than has been the case in the past. We 
 shall see house prices rising by more than average earnings for the next few years as people seek to protect their pension provisions. I see that my hon. Friend the Member for Buckingham is frowning. Many of my friends in London believe that the property market in London is so hot because a number of people are buying flats to rent out to give them a capital gain that will help them in their old age. 
 It would be right to resist indexing by 18 per cent. this year because the Halifax says that the market has risen by 18 per cent. this year. The Economist of 15 June tells us that the major threat to the Labour Government is the future house price correction. It says that a house price correction 
''is on its way and the Government won't like it any more than homeowners will.''
 There is a strong case for considering a new, strategic, approach to inheritance tax. The Minister should consider two modest proposals before the next Finance Bill: one is the proposal to index in line with earnings rather than with inflation; and the other is to exempt the principal private residents from taxation altogether. Those alternative proposals would address the problem that the Financial Secretary faces. However, I urge her not to rely on the fact that she is over-indexed in terms of the proposal.

Edward Davey: With the leave of the Committee, I would like to make a few brief comments, even though I was not here at the start of the debate. While I have been here, it has been interesting. I have strong concerns about how inheritance tax bites, not only in London and the south-east but across the country. Increasingly, people who cannot afford good tax planners pay inheritance tax.
 Inheritance tax is increasingly a random or lottery tax, paid for by people who die young in accidents or car crashes and have not thought about tax planning. They leave young families without resources because the taxman has grabbed some of them. Alternately, the taxman hits people on relatively modest incomes who happen to have stayed in a property for many years, the value of which has increased substantially. However, such people never thought that they would need to make provision for tax planning or did not have the income to afford it. 
 Although substantial sums of inheritance tax revenue come from wealthy people, increasingly that is not the case. Large proportions of inheritance tax revenue come from people on relatively modest incomes, which is a major change from when the tax and its predecessors were introduced. They were aimed at trying to put a tax base on the super wealthy. Now that is not the case, so the need to reconsider the rationale behind the tax grows year by year. 
 I urge the Government to consider inheritance tax in terms of an overview of capital taxes. The distinction that I would make between it and, say, capital gains tax is that although CGT has economic distortive effects, it is important in terms of underpinning the strength and integrity of the income tax system. Without a CGT system, it would 
 be easy for people to convert income into capital gain and escape income tax. Inheritance tax does not play that role at all. There is no economic reason for it, as it does not impinge on other aspects of the revenue-raising devices in the Exchequer's armoury. 
 Therefore, the Government must consider seriously a reform of capital taxes, to see whether they could radically restructure inheritance tax and even—dare I say it?—abolish it. At the same time, they must ensure that some of the revenue that would be lost from that reform was clawed back elsewhere. Although the Financial Secretary will probably say that the public finances are in robust health, I am not suggesting that we can have across-the-board tax cuts and abolish inheritance tax without looking for other sources to raise that revenue. Before Back-Bench Labour Members rush off to the Library to tot up the Liberal Democrat tax proposals in Committee, I should say that that is not my position. 
 The Financial Secretary and her colleagues should consider that idea, although she will clearly not do so today. As the hon. Member for Epsom and Ewell said, there are many knock-on effects on the pension sector, the care sector and industry in general. When I talk to business men and tax advisers—my hon. Friend the Member for Torridge and West Devon was one in a former life—about inheritance tax, they tell me that they spend huge amounts of time planning for the tax, at huge private sector cost. No doubt there is public sector cost on the other side of the equation. However, there is little gain to the Exchequer. In terms of compliance costs alone, there is a case for having another look at the tax. 
 I conclude by congratulating the Government. They are raising the allowance above RPI: a modest step in the right direction. However, it is time to look again at the tax, which has been given to us by history, but does not apply in the modern world.

Ruth Kelly: We have had a very interesting debate on inheritance tax, with contributions from many Members. I am grateful to the hon. Member for Mid-Worcestershire (Mr. Luff) for reminding the Committee that in the Budget the Chancellor raised the rate at which inheritance tax becomes due from £247,000 to £250,000. I would like to remind the Committee that the legislation says that the inheritance tax threshold, along with other tax measures, rises with inflation unless otherwise specified by the Chancellor. The Chancellor specified otherwise this year. It is useful to set the recent modest increase in context.
 I am also grateful to the hon. Gentleman for reminding the Committee that various organisations and representative bodies, and indeed hon. Members, make different predictions about what will happen to house prices. While some claim that house prices may rise because of the buy-to-let phenomenon, others argue that house prices may be about to suffer a sharp correction. It would be wrong to infer too much about future policy from the recent increase in house prices. The Government take a longer-term view, rather than acting on the basis of last month's—or last year's—figures, and I very much hope that we continue to do so. 
 It might have been useful had the hon. Gentleman also reminded the Committee that this modest measure still raises £2.5 billion for the Exchequer each year. That is the latest estimate for the revenue from this measure that we have for the current financial year. The hon. Member for Cities of London and Westminster (Mr. Field) and others who propose the abolition of inheritance tax must argue for a replacement source of finance, otherwise it would be only right if my hon. Friends were to tally up the spending commitments in this Committee and hold Conservative Members to account at a later date, a point ably made by the hon. Member for Kingston and Surbiton (Mr. Davey). 
 The right hon. Member for Fylde, as well as the hon. Member for Kingston and Surbiton, argued on several fronts that the tax was somehow historic and a hangover from the past with no relevance today.

John Bercow: I know that the Financial Secretary will not be tempted to misbehave in important matters of costing, but can I put it on the record for the avoidance of doubt that, although a very stimulating debate has already taken place, there has been no spending commitment by the Conservatives on the matter? That point is clear to me, it is clear to my hon. Friend the Member for Arundel and South Downs, and to the person to whom both of us defer, my hon. Friend the Member for Mid-Worcestershire.

Ruth Kelly: I thank the hon. Member for Buckingham, who speaks for the Opposition on such matters, for clarifying that for the record. It would indeed be quite a significant spending commitment had the Opposition said today that they proposed to abolish inheritance tax. I am glad that that has been put right for the record. However, that does not mean to say that we cannot hold individual hon. Members to account in future for the spending commitments that have been made, and I am sure that that will be done.
 The debate has betrayed, in many senses, the Opposition's obsession with housing wealth and house price rises at the expense of increases in other asset prices, depending on the assets to which one is referring. It is only right that housing is seen as part of a portfolio of different sources of wealth, and inheritance tax makes no specific distinction between the different sources of wealth. It is understandable that housing should dominate thinking at this time of rapid house price rises, but it is certainly not the case that housing is the dominant asset for people paying inheritance tax. 
 The latest figures that we have for inheritance tax payers are for 1998-99, but that is not too distant for us to refer to them usefully today. They show that inheritance tax payers in the 80 to 84 age group, a very typical age for those paying the tax, had less than a quarter of their total wealth in housing. That was matched by their holdings of cash and was far less than their holdings of stocks and shares. Even in the under–65 age group, about 8 per cent. of all inheritance tax payers, stocks and shares were a greater proportion of wealth holdings than property. Of course, that does not mean to say that house prices have no effect on 
 that group. They do have an effect, but that should be put in context and seen in proportion. 
 Some hon. Members have been arguing that house price rises have drawn more and more people into the inheritance tax net recently and they have particularly pointed to differential property prices in London and the south-east compared with other parts of the country. I remind the Committee that we should not look merely at the short term, but see house prices in a longer context. It would be foolhardy to react solely on the basis of a recent surge in house prices. Those with long memories will no doubt recall the housing boom that preceded the recent one.

Ann McKechin: My hon. Friend the Financial Secretary has made a very good point about looking at the long term. While house prices have been increasing in certain parts of the country, the stock market has suffered a serious decrease in valuation. As she correctly pointed out, most estates involved in inheritance tax have a fairly significant stocks and shares portfolio. There is a degree of balance going on between the two elements. As the hon. Member for Mid-Worcestershire pointed out, some people are now moving into property to try to counter that, but it has to be seen that most people who have assets liable to inheritance tax are likely to have a different balance of assets to cover the different risks that occur at different times in stock and property valuations.

Ruth Kelly: I thank my hon. Friend for an extremely important point. It is true that people have the opportunity to diversify their portfolios. It is also the case that if the value of their house has increased significantly, people have the opportunity to cash in on that and move. For example, 40 per cent. of Londoners have been in their homes for less than five years. It is not the case that death leads to an unexpected tax for which people did not have an opportunity to prepare.
 While house prices have been growing faster than the inheritance tax threshold in recent years, that reflects a rebound after house prices fell by 30 per cent. in real terms in the late 1980s and early 1990s. Looking at the longer-term picture, even just for house prices, the threshold has kept pace and the picture is much more balanced. If we include other assets, the threshold for inheritance tax has clearly kept pace with the overall increase in assets over a slightly longer time period. 
 I do not accept the point that inheritance tax is sometimes a form of double taxation. That is just not the case.

Peter Luff: It is.

Ruth Kelly: Let us look at VAT and changes in VAT. The hon. Member for Mid-Worcestershire, from a sedentary position, suggests that VAT is a double tax as well. I would not accept that point, but clearly we start our debate on taxation from different bases. In many respects, inheritance tax is not fundamentally dissimilar to that.

Peter Luff: If one earns income and pays tax on it and then buys goods and pays VAT, it is double
 taxation, and the same thing applies to inheritance tax. If one earns income, builds up assets and pays tax on them when one dies, it is double taxation. That may be justifiable, but the Financial Secretary cannot deny the truth.

Ruth Kelly: It is often the case that housing wealth and assets built up through increases in house prices come from sources that are not taxed, or certainly not taxed fully. I do not accept that that is a form of double taxation.

Chris Grayling: The Financial Secretary is trying to have her cake and eat it. The wealth of a key group of inheritance tax payers does not largely come from property, but she is using the property example to defend double taxation. It is surely the case that if one earns money, pays income tax on it, puts one's money into a savings account, pays tax on the interest and then dies and pays inheritance tax on one's estate, that is treble, rather than double, taxation.

Ruth Kelly: The hon. Gentleman can define double or treble taxation in any manner that he chooses, but that is not an argument that the Government and I accept, and we never have. No one has ever argued that one should be exempt from a tax such as VAT because one has already paid income tax. I do not accept the principle of the argument that inheritance tax is different from other forms of tax.
 Several hon. Members have suggested that abolition or changes to the inheritance tax threshold could combat undersaving by people who are attempting to build up savings for their retirement. I certainly do not accept that that is the case. It is not the case that those who have accumulated vast wealth in housing are those who currently have difficulties in retirement. I will not bore or detain the Committee with the details of what we are doing on the retirement front, but I do not accept that reforms to the inheritance tax threshold would somehow help. I do not accept the thesis that it is inevitably for the good of the nation that people are able to hand down from generation to generation vast amounts of wealth that has been built up during the course of one generation. That is not necessarily a good thing.

John Burnett: The perversity of this tax is, of course, that the richer one is, the less likely one is to pay it. I hope that the Financial Secretary will accept that that is because it is easy legitimately to organise one's affairs to avoid tax if one has a lot of assets and money. The people in the middle ground are the ones who will get caught. Sometimes we talk about people being in the middle ground, but some of them are not well off.

Ruth Kelly: I understand the hon. Gentleman's point and people clearly take advantage of tax reliefs and tax-avoidance measures in order to get round some of the provisions that we have in place, which is their right for obvious reasons. However, I do not accept his case that people on very modest incomes are falling into the inheritance tax trap. The percentage of such people who pay inheritance tax is more than that that suggested earlier by the right hon. Member for
 Fylde. The actual figure is 4 per cent., but that still does not represent a significant sum.
Mr. Jack rose—
Mr. Flight rose—

Ruth Kelly: I give way to the hon. Member for Arundel and South Downs.

Howard Flight: For the record, when people refer to the ability to give and live for seven years, they often forget that if someone gives something to their children, capital gains tax, which is often not very different from an inheritance tax bill, must be paid on it. There are sometimes wrong notions about how capital gains tax and inheritance tax work together.

Ruth Kelly: I thank the hon. Gentleman for making an illuminating point for the Committee.
 I should like to expand on the point about assets because the Government are committed to spreading wealth, assets and opportunity, and we have proposals that are specifically designed to do that. There has been an over-emphasis on income as a means to greater opportunity, and we have to look at wealth as well as income. The way to do that is not to encourage the very wealthy to hand down money to their sons and daughters, but to spread assets more widely among those who do not have any. That is why we are proposing, for example, the child trust fund, which will give an endowment across the population, give more to families on lower incomes and allow children to build up assets from birth that they will be able to access at the age of 18. We have proposals to spread assets, which are an important component of our strategy to combat poverty and inter-generational inequality.

Michael Jack: Before the Financial Secretary moves too far away from the point at which she used the word ''vast''—she said that she did not like vast wealth being passed on—can she for the benefit of the Committee define in monetary terms what she means by that?

Ruth Kelly: No, I shall not define the words that I used; I think that they make sense to Committee members.
 If we are to use taxpayers' money to spread wealth, we should use it to spread wealth among groups that have the least opportunity and advantage in our society, rather than to the benefit of others. For those reasons, I argue that the clause should stand part of Bill.

Michael Jack: I listened with interest to the Financial Secretary, and I thank her for responding to an interesting discussion on the clause. However, she has not responded to the challenge from the Opposition side of the Committee. Back-Bench Members certainly called for a reconsideration of the purpose of inheritance tax.
 The Financial Secretary attacked us for basing our arguments on the question of house prices, and said that people accumulated personal wealth by other mechanisms. However, she will be aware that her Government introduced individual savings accounts, and that their predecessors—personal equity plans—
 will have accumulated wealth. Some people who have been using such savings vehicles to busily save to the maximum year on year are, I would hazard a guess, sitting on £150,000 to £200,000 of tax-free gain. They could be living in the most modest of properties—namely, valued at £50,000—and still be caught by the provision. The Government must decide on the objective of their strategy on capital tax. 
 The Financial Secretary may have a point that some large estates have grown to their size because the owners of the assets managed to circumnavigate taxation. Many lesser mortals have not been able to do that because they are PAYE taxpayers and must pay taxes because no mechanism exists legitimately to circumnavigate them. However, the point is that we are to be denied the opportunity to review that fact. 
 In justifying her support for the clause, the Financial Secretary invited those of us who implied that there was a case for abolishing inheritance tax to suggest where the missing money could come from. The Government have the solution in their hands. As we discussed at the beginning of the Bill, the National Audit Office produced a report on the indirect tax system, and the hon. Lady knows that that is losing more than £7 billion a year. If she and her Government ran it properly she would have more than enough to make up the missing money. There are ways and means.

Tom Harris: Will the right hon. Gentleman tell the Committee whether his enthusiasm for abolishing inheritance tax is a new-found belief, or whether he expressed it when he was a Treasury Minister in the previous Conservative Government?

Michael Jack: I believe that the hon. Gentleman will find that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) indicated in speeches that in the long term it was certainly the intention of the then Conservative Government—I absolve my right hon. and hon. Friends on the Front Bench from any imputation that they may wish to follow these routes—to abolish not only inheritance tax but capital gains tax. The problem that we faced was one of economy. I would have been delighted if the Financial Secretary had said that the Government needed £2.5 billion and that such taxes were a nice way of getting it, because those who are taxed are dead and cannot say anything about it. That would have been an honest reply, but we did not get an honest reply. We got a pseudo-justification.
 I have given the Financial Secretary a way of recovering the necessary moneys. There is a case to be made for re-examining capital taxes to determine whether they are effective, given the fact that there are ways around them. A £250,000 limit, up by all of £3,000, may be welcomed by some people at the margin of the last pound—I would not deny that. However, the Government should reconsider the tax and the way that it operates because, as discussed by Opposition Members, there may well be circumstances that the Government would subsequently regret. 
 Question put and agreed to. 
 Clause 115 ordered to stand part of the Bill.

Clause 116 - IHT: powers over, or exercisable in relation to, settled property or a settlement

Question proposed, That the clause stand part of the Bill.

Roger Gale: Clause 116, although clearly a different provision, relates very much to the same subject. I trust that we will not rehearse the same debate again.

John Bercow: I have no intention of doing anything of the kind. We are here to debate clause 116, which relates to powers over, or exercisable in relation to, settled property or a settlement. My understanding is that the clause deals with a recent court decision, the Melville case; I will no doubt be corrected speedily if I am mistaken. The decision led to uncertainty for trustees, and the purpose of the clause is to reverse the decision and to end the uncertainty.
 In the context of the Government's intentions and of the case to which they relate, it is relevant to report to the Committee the view of respected bodies and interested parties. The tax faculty of the Institute of Chartered Accountants in England and Wales has made critical observations on the clause. It is concerned that new section 55A in subsection (3) is likely to create uncertainty in relation to many arrangements that are outside its target. 
 For example, suppose that a person receives a power on a trust reorganisation that he did not have before and that, at the same time, existing powers are circumscribed or reduced. It is possible in such circumstances that the second change might be interpreted as consideration of the first. That is the tax faculty's fear, which I hope that the Financial Secretary will be able to deal with successfully. New section 55A is intended to deal with a very unusual circumstance. The tax faculty of the Institute of Chartered Accountants questions whether its introduction is justified in the light of the uncertainties that it believes the clause, particularly that part of it, is likely to create. The tax faculty would welcome clarification of why the spouse, charity and other exemptions are excluded in new section 55A(1)(d). 
 It will be blindingly obvious, to your satisfaction, Mr. Gale, that I do not intend to rehearse earlier arguments. However, to record the view of the Chartered Institute of Taxation must surely be relevant. It has informed us that subsection (7) 
''will need amending to ensure that potentially exempt transfers which become chargeable as a result of a death before 17 April 2002 are also excluded.''
 It queried 
''the necessity of the new section 55A and''
 thinks 
''that, if enacted, its powers will'',
 whatever the intention, prove to be too wide. 
 The institute is 
''concerned that it will affect many arrangements outside what''
 it believes to be 
''its targets. For example, in a trust reorganisation it may be that trust powers are given up or transferred as part of a larger reorganisation where the transferee acquires revised interests and powers.''
 Such an arrangement 
''could amount to consideration bringing these anti-avoidance provisions into effect inappropriately.''
 It is therefore concerned that the provisions 
''will apply where settlement powers are acquired 'for consideration in money or money's worth' on a trust reorganisation.''
 The institute 
''would like some explanation as to why this detailed new section is necessary.''
 With all the humility that I normally demonstrate and which you have come to expect habitually from me, Mr. Gale, I am bound to say that if the Chartered Institute of Taxation feels in need of clarification and justification of the new measure, who am I to demur?

John Burnett: I shall refer to one of the points made by the hon. Member for Buckingham. The brief that I have came from the Law Society, which seems to welcome the bulk of the clause. It clears up confusion, and the revenue law committee of the Law Society, on which I had the honour to serve for some 12 years, is concerned about potentially exempt transfers which fall into account because of the death of a person not, as the hon. Gentleman said, before the date, but after 17 April 2002. The Melville decision effectively included those trust powers—powers of appointment and so on—in the definition and held that they were property, but the Inland Revenue's capital taxes office did not hold that view, nor did the tax profession.
 This welcome clause reverses that decision and we are back to where we started, except, as the Law Society told me, for this one particular point. I would welcome the Financial Secretary's comments on clause 116(6) and would like to know whether the Government are prepared to amend the clause to cover the anomaly when a potentially exempt transfer becomes chargeable by reason of the death of any person on or after 17 April 2002.

Ruth Kelly: The clause serves two purposes. First, it blocks a tax avoidance scheme, which was found to work in a recent court case, as the hon. Member for Buckingham rightly said. That in itself would be sufficient reason to take action in the Bill, but it also responds to widespread representations from tax advisers that the court's decision had an unexpected and unwelcome consequence for their clients, which needs to be reversed. It is unusual for tax advisers to come to us and say, ''Please block a tax avoidance loophole'', but that is what happened in this case. They took the view, and we agreed, that the court's decision had thrown up a fundamental structural weakness in the way that the current inheritance tax legislation deals with trusts and the powers over them.
 It turns out that the powers work in a way that the designers of inheritance tax never intended, which the vast majority of taxpayers and their advisers had never 
 thought to be the case when they arranged their affairs. Very briefly, the court found that power over trusts, such as the power to direct who should receive the property, or to have the trust broken up, was itself valuable property for inheritance tax purposes in the hands of the holder. That value is in addition to the value of the trust property itself, which has always been taxable in the various ways set out in the inheritance tax legislation, which were previously thought to be the only ways that trusts and their properties came into the reckoning. 
 Confirmation of this new understanding was welcome news to the taxpayer using the particular tax avoidance scheme that had been created to minimise his or her tax liabilities. However, it was very unwelcome news across a much wider class of cases when holders of powers found that they suddenly owned highly valuable property that was potentially subject to inheritance tax. Previously, those powers had been disregarded for inheritance tax purposes. The result in some cases is that the value of trust property may turn out to be taxable twice over, and more generally that essentially innocent financial arrangements have suddenly gone badly wrong in ways that the designers of the legislation never intended and which may be difficult at best to unscramble. We agree with the representations we have had that that needs to be corrected, so that powers over trusts are disregarded, as originally intended. 
 I hope to deal with some of the specific points raised by hon. Members. Let me start with the points made by the hon. Member for Buckingham, who has cited concerns put forward by the Institute of Chartered Accountants. The institute was concerned that trusts could be caught by the anti-avoidance provisions simply because of innocent reorganisation. The clause says that powers over trusts should not count as property for inheritance tax purposes. If abused, that would create scope to make valuable assets disappear for inheritance tax purposes. We know from experience, even if it were not obvious, that we need effective protection against such avoidance, and because there is no single structure, and we have to guard against it, it has to be written in fairly general terms. 
 It is said that innocent reconstructions of existing trust arrangements could fall foul of the provisions if people get a new power as part of a larger deal. It is certainly the case that any reconstructions involving new powers will have to take account of the constraints of the new anti-avoidance provisions. I do not apologise to the Committee for that. Even if such transactions are innocent, they are certainly not everyday events, nor in any way straightforward. Even before the introduction of clause 116, they inevitably involved very large funds, and skilled advisers already have tax considerations at the forefront of their minds. I believe that they can steer their way around any tax issues that arise from clause 116, and I have not seen any detailed case in which they would not be able to do so. I make the commitment to the Committee that, if such a case does emerge, we will be willing to consider it. 
 The hon. Member for Buckingham also asked for a general justification for the provisions in new section 55A. Not for the first time, the detailed scrutiny that the whole area has had during the course of the litigation shows that it would simply not be safe to return to the original understanding of the law with nothing else said. Closing one loophole would make scope to exploit a new one along lines that were outlined only too intelligently during the course of the case. We have added an anti-avoidance provision to new section 55A of the Inheritance Tax Act 1984 to cover the artificial case for people with tax avoidance in mind by the use of a power that we created for that purpose. We do not think that people will do that for non-tax reasons, and we think it is right to put a clear deterrent in place so that people do not do so with avoidance in mind. 
 The hon. Gentleman also asked why spouse exemptions are included in new section 55A. The answer is that transactions caught by new section 55A are likely to involve avoidance whether or not a spouse is involved. 
 The hon. Members for Torridge and West Devon and for Buckingham mentioned pre-Budget transactions. We do not encourage retrospective legislation or like to see it in place, even when it is wholly relieving, as it is here. The background to this legislation was a court decision that was unwelcome news to the Inland Revenue, just as much as it may have turned out to be unwelcome news for taxpayers. The risk of such unpleasant surprises is something that we have to take when we are involved in a matter as relatively complex as estate planning using trusts.

John Burnett: The Government are right to have made the amendments. It is a feature of inheritance tax that there is a regime of potentially exempt transfers. When those transfers fall into charged inheritance tax, as some of them will within seven years of 17 April this year, surely the same rules should apply to those potentially exempt transfers as apply to all matters from 17 April. The same rule should apply to each.

Ruth Kelly: If the hon. Gentleman lets me continue the point that I was making, he will hear me say that I believe that the risk of unpleasant surprises must be taken on board when embarking on such complex
 estate planning using trusts. In the present case, we decided that it made practical sense to reverse the unwelcome side-effects in a defined class of cases—essentially, people who are just sitting there with unused power in their possession, which would be taxable apart from clause 116, simply because the holder had died.
 In practice, for example, the holder might have forgotten that they had such power, or never really been aware of it. It could have been buried away in fairly routine life insurance policies, for example, or set up in trust form. We were also conscious that there were other potential losers from the court's decision, not covered by this degree of retrospection. However, there are cases where the holder has chosen to do something with their power and so created a potentially exempt transfer, which has then become chargeable because of their death. 
 A fine judgment has to be made, but we think that when people choose to make transfers in their lifetime, it is up to them and their advisers to judge the risks and to provide for the consequences. On balance, I do not think that it would be right to stretch the retrospection further. 
 The arguments for reversing the effects of the court decision have been pressed on us by the representative bodies. We agreed that the case for the clause was strong. I therefore recommend it to the Committee.

John Burnett: I am grateful to the Financial Secretary for her explanation, but she used the expression that it is up to people who make the transactions to judge the risks. My point is that they cannot have judged the risk because they did not know the risk. Everyone, including the Revenue, thought that the law was entirely different from what the Melville case upheld. It seems to me that it would be fair and proper to put all parties in the same position—that in which they thought the law put them at the start.
 Question put and agreed to. 
 Clause 116 ordered to stand part of the Bill. 
 Further consideration adjourned.—[Angela Smith.] 
 Adjourned accordingly at one minute to Seven o'clock till Thursday 20 June at half-past Nine o'clock.